State Usury Laws, Borrower Credit Risk Steer Auto Loan Rates

Members in Alaska, Michigan and Oregon may have an edge over others when it comes to shopping for a vehicle.

According to rate tracking firm GoBankingRates.com, the three states had the lowest auto loan rates in the country as of July 24, the latest period tracked. Michigan led the pack at 3.03% followed by a tie between Alaska and Oregon at 3.04%.

Using data compiled from its interest rate database and aggregating rates from more than 4,000 U.S. financial institutions, GoBankingRates.com said it examined base rates offered by credit unions and banks on new car loan products using a statewide average of rates to determine ranking.

The highest auto loan rates were found in Connecticut (4.82%), New Jersey (4.47%), and Rhode Island (5.11%).

Several factors that are driving rates up and down the scale, said Casey Bond, managing editor of GoBankingRates.com, which is based in Los Angeles.

“One is the credit risk of the borrower. Lenders will set the interest rate offer based heavily on their credit,” Bond said. “If a pool of borrowers is riskier, that can tend to drive up rates in a certain area.”

Another factor impacting rates is usury laws, Bond said. Because the limits are higher in certain states, those states can charge higher rates. She said in Oregon, for example, the cap is 7%, while Washington, D.C.’s cap is more than triple that amount at 24%. Banks with more capital tend to also offer slightly lower rates, she said.

“Just because a state ranks a certain way doesn’t mean a person is going to have guaranteed access to good rates,” she said. “But if they take the time to look on the local level, they do exist.”

For the past few years, credit unions have consistently offered low auto loan rates compared to other lenders. The latest data from Callahan & Associates showed that new auto loans are the fastest growing component of the industry’s loan portfolio.

That surge has been fueled by an increase in new car sales with new auto loan balances up 11.2% over the past year. Callahan said used auto lending also remains strong as credit unions offer a variety of refinancing programs to help members lower their monthly payments.

Rounding out the list of the states with the best average auto loan rates were New Hampshire, North Carolina, Oklahoma, South Carolina, Utah, Vermont and Washington.

Eddie Nevarez, vice president of business development for the Newport Beach, Calif.-based National Auto Loan Network, which counts credit unions among its clients, said he is not totally convinced that certain states have auto loan rate advantages over others.

“There does not seem to be any rhyme or reason for the spike in rates other than borrowers with lower credit scores are receiving auto loans,” Nevarez said. “In the second quarter of this year, 23% of auto loans funded were to borrowers with credit scores below 620, but the increase in rates would be seen nationwide, unless the majority of these loans were funded in these states.”

He also said more consumers have financed directly through the dealership, where rates have historically been higher, regardless of credit scores.

Still, looking at the country as a whole, new and used funded auto loan rates are highest in the Northeast and much lower in the Western portion of the country, Nevarez pointed out. In fact, the Northeastern states’ various credit unions are currently offering rates as low as 1.49% for 36 months, 1.79% for 60 months and 2.99% to 3.49% for loans up to 84 months, he added.

“I do not see a reason for the disparity in interest rates,” Nevarez said. “This does not equal out to an increase in rates, seeing that all financial institutions want to keep their rates competitive.”

Meanwhile, he wondered if some consumers are not doing their due diligence by seeking financing prior to walking on the dealer lot.

“For those consumers who are not savvy to the auto sales and lending worlds, this is a recipe for disaster,” Nevarez said.